Apr 24, 2020

I'm a little late, but I want to answer for the sake of completeness.

>>"Honestly I don't know what point you're trying to make, or what deficits or surpluses have to do with anything."

You say "Inflation is caused by additional dollars chasing the same number of goods". We agree with that (it could be a supply problem too, but that's another subject).

Now, it seems to me that we agree also that a government deficit can be inflationary. So, by definition, a government deficit is adding money to the economy.

My question is: if a government deficit is adding money to the economy, what a government surplus is doing? That's the meaning of "taxes destroy money".

>>" The question you need to ask yourself is, where did those reserves come from? Another question you need to ask is, when Fed engages in QE, why does the monetary base increase? "

Monetary base increase because that is how it's defined.

I think that the problem here is that you subscribe to the fractional reserve banking theory that, I'm afraid, is false. I suggest reading this report from the Bank of England (1) about how money creation works. A private bank lending is not limited for the quantity of reserves available in the system, because central banks have to keep the system of payments working and are targeting an interest rate. So, central banks have to answer any request for additional reserves.

The corollary to all this, is that it doesn't matter if the asset of the private bank is a treasury or reserves in the banking system, banks can lend anyway. The central banks sell treasury to the banks for controlling the interest rate, not the quantity of money.

1. - https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Apr 14, 2020

>>"This coupled with fractional reserve banking means that the banks can make a whole lot more loans, flooding the system with liquidity so that money can start moving again."

That's not how it works.

First, never mind how much money banks can lend, if there is nobody asking for credit. You can't create demand for credit by QE.

Second, private banks are not limited in their capacity for creating credit by the quantity of reserves available. If central banks are going to keep their interest rate target they have to facilitate any demand of reserves by private banks.

It's impossible for a Central Bank to control the quantity of money and the interest rate, they have to choose one, and they choose the interest rate.

As I said in another post, I was totally confused about how it works until I started to read the Modern Money Theory version of all this.

Here, explained by the Bank of England (pdf):